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Review of Industrial Organization

, Volume 44, Issue 4, pp 347–365 | Cite as

Risk Aversion and Technology Portfolios

  • Guy Meunier
Article

Abstract

This paper analyzes the choice of a technology portfolio by risk-averse firms. Two technologies with random marginal costs are available to produce a homogeneous good. If the risks that are associated with the technologies are correlated, then the firms might invest in a technology with a negative expected return or, conversely, might not invest in a technology with a positive expected return. If the technology with the lower expected cost is riskier than the other technology, then this “low-cost” technology will be eliminated from the firm’s portfolio if the risks are highly correlated. With imperfect competition, the portfolios of firms are different, and the difference in risk tolerance can explain the full specialization of the industry: The less risk-averse firms use the low-cost technology, and the more risk-averse firms use the less risky, higher-cost technology.

Keywords

Risk aversion Investment Technology mix 

Notes

Acknowledgments

I gratefully acknowledge the support from the Business Sustainability Initiative at European Institute of Finance, and the very helpful comments of the editor Lawrence White.

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Copyright information

© Springer Science+Business Media New York 2014

Authors and Affiliations

  1. 1.INRA, UR1303 ALISSIvry-sur-SeineFrance
  2. 2.Department of EconomicsEcole PolytechniquePalaiseauFrance

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